decreasing returns to scale

Examples of decreasing returns to scale in the following topics:

• Economies and Diseconomies of Scale

  • There are three stages in the returns to scale: increasing returns to scale (IRS), constant returns to scale (CRS), and diminishing returns to scale (DRS).
  • Returns to scale vary between industries, but typically a firm will have increasing returns to scale at low levels of production, decreasing returns to scale at high levels of production, and constant returns to scale at some point in the middle .
  • The first stage, increasing returns to scale (IRS) refers to a production process where an increase in the number of units produced causes a decrease in the average cost of each unit.
  • This graph shows that as the output (production) increases, long run average total cost curve decreases in economies of scale, constant in constant returns to scale, and increases in diseconomies of scale.
  • Identify the three types of returns to scale and describe how they occur

• Long Run Supply Decisions

  • This period of supply is known as "increasing returns to scale," because a proportional increase in resources yields a greater proportional increase in output.
  • This period of supply is known as "decreasing returns to scale," because a proportional increase in resources yields a smaller proportional increase in its amount in output.
  • In the early stages of the market, where only one or a few firms are producing goods, the market experiences increasing returns to scale, similar to what an individual firm would experience.
  • Eventually the market reaches a state of constant returns to scale.
  • Eventually, production of goods in a market yields less of a return than the amount of goods that go into product, which causes the market to enter into a period of decreasing returns to scale and the market's supply curve slopes upward.

• Production and Cost in the Long-run

  • The terms "economies of scale," "increasing returns to scale," "constant returns to scale," "decreasing returns to scale" and "diseconomies of scale" are frequently used.
  • Conceptually, returns to scale implies that all inputs are variable.
  • When α+β = 1, the production process demonstrates "constant returns to scale. " If L and K both increased by 10%, output (Q) would also increase by 10%.
  • When α+β < 1, decreasing returns are said to exist.
  • In Figure V.9 economies of scale are said to exist up to output QLC.

• Marginal Product of Labor (Physical)

  • The second column shows total production with different quantities of labor, while the third column shows the increase (or decrease) as labor is added to the production process.
  • The law of diminishing marginal returns ensures that in most industries, the MPL will eventually be decreasing.
  • The law states that "as units of one input are added (with all other inputs held constant) a point will be reached where the resulting additions to output will begin to decrease; that is marginal product will decline. " The law of diminishing marginal returns applies regardless of whether the production function exhibits increasing, decreasing or constant returns to scale.
  • Under such circumstances diminishing marginal returns are inevitable at some level of production.
  • This table shows hypothetical returns and marginal product of labor.

• The Law of Diminishing Returns

  • In economics, diminishing returns (also called diminishing marginal returns) is the decrease in the marginal output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant.
  • The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.
  • However, as marginal costs increase due to the law of diminishing returns, the marginal cost of production will eventually be higher than the average total cost and the average cost will begin to increase.
  • The typical LRAC curve is also U-shaped but for different reasons: it reflects increasing returns to scale where negatively-sloped, constant returns to scale where horizontal, and decreasing returns (due to increases in factor prices) where positively sloped.
  • Both marginal cost and average cost are U-shaped due to first increasing, and then diminishing, returns.

• Few Sellers

  • An oligopoly - a market dominated by a few sellers - is often able to maintain market power through increasing returns to scale.
  • One source of this power is increasing returns to scale.
  • Most industries exhibit different types of returns to scale in different ranges of output.
  • Cell phone companies have increasing returns to scale, which leads to a market dominated by only a few firms.
  • Explain how increasing returns to scale will cause a higher prevalence of oligopolies

• Harmonic and Melodic Minor Scales

  • All of the scales above are natural minor scales.
  • Harmonies in minor keys often use this raised seventh tone in order to make the music feel more strongly centered on the tonic.
  • (Please see Beginning Harmonic Analysis for more about this. ) In the melodic minor scale, the sixth and seventh notes of the scale are each raised by one half step when going up the scale, but return to the natural minor when going down the scale.
  • Melodies in minor keys often use this particular pattern of accidentals, so instrumentalists find it useful to practice melodic minor scales.
  • Listen to the differences between the natural minor (http://cnx.org/content/m10856/latest/tonminnatural.mp3), harmonic minor (http://cnx.org/content/m10856/latest/tonminharmonic.mp3), and melodic minor (http://cnx.org/content/m10856/latest/tonminmelodic.mp3) scales.

• Economies of Scale and Network Externalities

  • Economies of scale and network externalities are two types of barrier to entry.
  • Economies of scale are cost advantages that large firms obtain due to their size.They occur because the cost per unit of output decreases with increasing scale, as fixed costs are spread over more units of output .
  • Economies of scale are also gained through bulk-buying of materials with long-term contracts, the increased specialization of managers, ability to obtain lower interest rates when borrowing from banks, access to a greater range of financial instruments, and spreading the cost of marketing over a greater range of output.
  • A natural monopoly arises as a result of economies of scale.
  • Define Economies of Scale., Explain why economies of scale are desirable for monopolies

• Ecological Restoration

  • The purpose of ecological restoration projects, such as wildlife and ecosystem preserves, is to return ecosystems to pre-disturbance states.
  • Restoration ecology aims to return ecosystems to a more natural, pre-disturbance state.
  • It also makes sense to attempt to return them to their ecosystem if they have been removed.
  • Other large-scale restoration experiments underway involve dam removal.
  • The seedlings decreased erosion and provided shading to the creek, which improved fish habitat.

• Natural Monopolies

  • In other industries, the marginal cost initially decreases due to economies of scale, then increases as the company experiences growing pains (as employees become overworked, the firm's bureaucracy expands, etc.).
  • Along with this, the average cost of production decreases and then increases.
  • Natural monopolies tend to form in industries where there are high fixed costs.
  • A firm with high fixed costs requires a large number of customers in order to have a meaningful return on investment.
  • Once a natural monopoly has been established, there will be high barriers to entry for other firms because of the large initial cost and because it would be difficult for the entrant to capture a large enough part of the market to achieve the same low costs as the monopolist.